Month: July 2010

SHANGHAI’S key stock index yesterday rose for the third straight day, led by new-energy firms on speculation that the government’s massive investment in the sector will boost earnings. The benchmark Shanghai Composite Index increased 0.26 percent, or 6.66 points, to close at 2,535.39. Turnover shrank to 105.7 billion yuan (US$15.6 billion) from 116.4 billion yuan on Tuesday.New-energy stocks advanced after the central government released a plan yesterday to invest 5 trillion yuan to develop clean energy in the next decade. The blueprint will focus on reducing reliance on fossil energy and carbon emissions, the National Energy Administration said. Guangdong Baolihua New Energy Stock Co surged 10 percent to 5.70 yuan. SUFA Technology Industry Co, a leading valve provider for nuclear power plants, climbed 5.6 percent to 20.57 yuan. Guizhou Changzheng Electric Co gained 1.3 percent to 10.39 yuan.“New energy and other emerging sectors are expected to gain substantial support from the government amid its push to restructure the economy,” said Wang Fan, an analyst from Donghai Securities Co. “These companies may replace the property industry to provide new momentum that will shore up the stock market.”

Airliners also gained after the Civil Aviation Administration of China said domestic carriers carried 21.8 million passengers in June, up 23 percent from a year earlier.

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Shanghai shares rise for a third day in row

A week ago we published a guest post from David Galland of Casey’s Daily Dispatch in which Galland presented his view on what the consequences of the upcoming introduction of a 1099-filing requirement for gold transactions over $600 would be. “Can’t a person just keep their gold purchases under $600? With the price
of gold heading higher, that will increasingly require buying
smaller-denomination bullion coins ” which typically carry a higher
premium. More importantly, a large body of case law gives the government
license to charge people for “structuring” ” i.e., taking active
measures to get around a particular law. Thus, two $500 gold purchases
could be construed as active evasion and carry additional penalties.” The topic is suddenly red hot once again, this time with ABC finally getting on the bandwagon.? The sudden interest into gold tax reporting requirement is occurring as gold selling companies are increasingly being put under a regulatory microscope:Several legal responses have already been drafted in opposition to the proposed “healthcare” law:

Yet while the escalating surveillance over the gold market can not infuse one with confidence that gold transactions will not be increasingly regulated in the future, as David Galland pointed out last week, the implications are more substantial than just in regulating the gold market:And for those that may have missed it, here is David’s previous conclusion:

Even as Bernanke is receiving his last minute briefing on what to say (everything, EVERYTHING, is good) and what to play dumb on (explaining the price of gold for example), a new report by the Center for Economic and Policy Research concludes that digging ourselves out of the current unemployment hole, which is 7.5 million less people having jobs than did in December 2007, will take at least 4 years, and not occur prior to March 2014. However, this assumes a flat working-age population, something the Fed would love to be the case. Alas, the country is growing: and if one incorporates the effects of labor force growth into the above analysis, as the CEPR authors have done using CBO projections, then we may have a much larger problem on our hands: the study concludes that taking into account the approximately 14 million new job seekers in the future, then the December 2007 unemployment rate will not be met until April 2021! Welcome to the new normal. Of course, both of these analyses assume that the economy will immediately commence growing and generating jobs at the recovery rate seen in the 2000s, when about 166,000 jobs per month were being added. With every month that this does not happen the 2021 date will continue being pushed out further into the future. Perhaps one of the Senators today can ask a question of Bernanke just how he plans on reconciling this glaringly simple explanation for why the US economy will be underwater for a period of over a decade.The CEPR report first describes the hole we are in:Looking at projection scenarios, here is the baseline scenario, which alone provides no Joy in mudville: using an assumed expansion case seen in the 2004-2007 economic recovery in which 166,000 jobs per month were created, the current 7.5 million hole would take about 4 years to fill. Yet what many completely have ignored up until the authors of this paper put it to paper, is that the US population is a-growing, and that factoring in the organic expansion of the US population will add millions to the labor force over the next decade: according to CBO estimates, the natural labor force growth rate is 90,000 a month. Adding this to the running future gap makes things far worse for any administration that will run on the promise of returning unemployment rate to recent levels. From the paper:

And keep in mind that the above scenario assumes that the economy adds 166,000 jobs a month each month, for just under 11 years straight! With the current economic prospects for the economy, in which companies continue to lay people off, and in which monthly NFP data is skewed drastically due to the ongoing side effects of the census, and where fiscal stimuli in fact encourage people to be unemployed and collect jobless insurance rather than work, this baseline assumption is ludicrous. The reality is that the economy will likely NEVER return to a December 2007 jobless rate, as proposed by El-Erian and his New Normal concept, just like the Fed will most likely NEVER raise rates in this latest iteration of pre-reset capitalism. And as the Fed’s dual mandate of jobs and inflation is now tarnished beyond repair, what other valid justification is there to retain the Federal Reserve which does nothing but skew the market, and necessitate the need for constant regulation? The only way to return to efficient markets is to do away with regulation completely, however that would also mean an elimination of the Fed, and its most artificial concept of free lending to banks via the Discount Window, i.e., endless moral hazard for Wall Street’s casinos. As long as the Fed persists, regulation is needed, which by definition creates perfect assymetries in the market, and sows the seeds for the next market crash. One can only dream that instead of lying to the population and to the Senate that all is well in the economy, that at today’s Humphrey Hawkins meeting Bernanke will instead anounce the end of the Fed. Alas, that will require a revolution (non-violent or otherwise), as the moneyed interests will never allow a change in the status quo of such massive proportions. Of course, if more and more people realize the true sad state of the economy driven to its current predicament precisely by the Fed’s constant one sided actions which favor a few millionaires at the expense of those that will be jobless for decades to come, perhaps this revolution is not that far off”¦Full CEPR paper can be found here. h/t Michael

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US Economy Will Return To December 2007 Employment Levels”¦ In 2021!

Huffington Post World News reports:Khaled Abu Toameh, to my mind the best Arab journalist working in Israel and the Palestinian territories, reports in today’s Jerusalem Post that “Palestinian Authority President Mahmoud Abbas has told his Fatah movement he wants a more specific US commitment on the borders of a future Palestinian state before agreeing to direct talks with Israel.“Abbas says he received assurances from US President Barack Obama, but that they weren’t clear “˜enough. ,” reports Abu Toameh “ He says he expects enormous pressure, but that he will not go “˜blindly’ into negotiations. “In other words, until Mahmoud Abbas knows the specific outcome of peace negotiations with Israel, he won’t even begin to negotiate the terms directly with Israel’s Benjamin Netanyahu. Even in Arabic that’s known as “hutzpa”. All of which resurrects the question many of us have been asking for decades: if the Palestinians are truly ready to divide Palestine into two peace abiding states ” one Arab and one Jewish -, why have they turned down every offer that’s ever been made to them to do just that ” even the one proferred in 2007 at a U.S.-sponsored peace conference in Annapolis by then Israeli Prime Minister Ehud Olmert for a Palestinian Arab state in 97 percent of the West Bank and the entire Gaza Strip. Abbas also used the occasion, and has used several since then, to categorically dismiss the request to recognize Israel as a Jewish state alongside the would-be Palestinian state, insisting instead on full implementation of the “right of return” of Palestinian “refugees” and their millions of on the global dole descendants..The answer, I fear, is that the Palestinians really don’t want that peaceful solution and will continue to stall for time until the Arab fantasy day when the Jewish state vanishes ” their ultimate goal.One of the best histories of this steady blockage procedure comes from Mideast historian Efraim Karsh. Editor of the Middle East Quarterly and author most recently of “Palestine Betrayed” (Yale), Karsh is professor of Middle East and Mediterranean Studies at King’s College, University of London.In a biting new article in the Jewish Ideas Daily and reprinted by the Middle East Quarterly, Karsh carefully traces the history of Palestinian avoidance of a Mideast peace solution that will result in two states for two peoples. Indeed, as he pointedly asks, “”¦ is there in fact a fundamental distinction between Hamas and Fatah when it comes to a two-state solution? Neither faction formally accepts Israel’s right to exist; both are formally committed to its eventual destruction. Moreover, for all the admittedly sharp differences between Arafat and his successor Abbas both in personality and in political style, the two are warp and woof of the same dogmatic PLO fabric.”Anyone interested in the truth about the Mideast crisis should read Karsh’s article in full:
http://www.meforum.org/2689/against-two-state-solution INVESTING CONTRARIAN Read more:
Richard Z. Chesnoff: Do the Palestinians Really Want Two States ” Or Are They Just Stalling?

Huffinton Post reportsI’m a long time advocate of genetic genealogy (full disclosure: I co-authored Trace Your Roots with DNA with Dr. Ann Turner), so the FDA’s public meeting regarding Oversight of Laboratory Developed Tests (LDTs) was of interest to me. As one of the roughly million customers who has purchased direct-to-consumer (DTC) DNA tests over the past decade, I’m keen to make sure I can continue to do so without undue interference or cost. Normally, I would expound upon my reasons, but one of the speakers today articulated the perspective of genetic genealogists (and other DTC test consumers) so well that I asked whether I could share her remarks here, and she kindly agreed. Katherine Borges is the Director of ISOGG, the International Society of Genetic Genealogy, a non-profit organization of over 7,000 members spread throughout the US and 60 other countries. What follows are her comments from today. Both she and I welcome yours.“Our (ISOGG’s) mission is to promote and educate members and the general public about the use of DNA testing for genealogical and ancestry purposes. We are comprised of serious enthusiasts who represent an active core of the estimated one million people who have taken DTC tests for genealogy and ancestry purposes since their inception about ten years ago. As the name of our society implies, our focus is primarily upon using DTC tests for genealogy, but a growing segment of our membership also use personal genome tests to trace health-related information within their families. However, testing for ancestry and anthropology is far and away the largest segment of the DTC genetic testing market. This clearly does not fall under FDA’s area of responsibility. Our concern is that FDA should not attempt to expand its regulatory authority beyond its proper domain of medical applications, and it should assure that its actions in the medical area do not inadvertently impact the non-medical applications.ISOGG is a dues-free society with no funding sources. The organization has no direct financial stake in any proposed regulation, and is not affiliated with or financially supported by the companies offering these tests. However, our members understand that they would bear the impact and resultant costs of any regulatory matrix imposed upon testing companies, first as taxpayers, and secondarily as consumers of the services they offer.Our membership is not opposed to regulation that works to protect or help consumers where a clear need for legislation is evident and an agreed-upon national purpose is fulfilled. In 2008, we supported GINA, and many of our members wrote to their legislators to urge them to pass this important bill. Additionally in 2008, ISOGG encouraged and facilitated the development of Y-chromosome nomenclature standards for Short Tandem Repeats or STRs by the National Institutes of Standards and Technology, and their subsequent adoption by the ancestral DNA companies and labs. These standards were published in the Fall edition of the free-access online Journal of Genetic Genealogy. This initiative for voluntary standards by a private organization is similar to the implementation of voluntary standards such as those of UL and NEMA in the electrical industry, and ANSI standards in many others. The great majority of our ISOGG membership feels strongly that any expansion of FDA regulatory authority that would have the effect of preventing consumers from ordering DTC tests would be unwise and unnecessary. At a minimum, no action of that sort should be taken without credible, compelling scientific data to support such a move. Relevant studies of this nature and quality are currently being conducted.

In making these statements I have in mind the role of the media and certain written academic opinions that over the past few years have sought to impact this issue. Sensationalistic media articles that relate anecdotal cases should not be used as a basis to regulate. Many of the articles I’ve read have been biased, reflecting the author’s views without presenting voices from both sides of the issue. For example, just last week, a DC area reporter was looking for stories from consumers of DTC testing for an article to be published in anticipation of this meeting. He was contacted by several individuals who had positive testing experiences, but he did not follow up on these contacts. He told another consumer that he was specifically seeking negative experiences. Even more seriously, we see a tendency towards a paternalistic attitude by certain groups in the medical professions who seek to limit access to medical information that is not directly under their control. Their arguments often express an extremely low opinion of the ability of people outside of their own professions to comprehend any genetic information or come to terms with its implications. Yet, we heard Col. Magill of Walter Reed state here yesterday that sometimes he sees a patient who knows more about a medical issue than he does, just from personal research. A mandated intermediary would impose yet another cost to consumers.Additionally, over-regulation can even negatively impact participation in scientific studies. My own mother signed up to participate in Kaiser Permanente’s genome study, but then backed out for the very reason that the results will not be returned to her. A barrier to access to one’s own genetic information also seems contrary to the intent of HIPAA law, and to the new rules issued last week by the White House requiring health insurance companies to provide free coverage for screenings, laboratory tests and other preventative care.The general view of ISOGG’s members is that regulatory agencies should not stand between a consumer who wishes to collect data on their own genome, and labs that can provide that service. The genome of an individual consists fundamentally of information, and every individual in a free society has an absolute right to information about their own genome from a source of their choosing. Our membership base consists of many MDs, PhDs, and other specialists who are willing to volunteer their time to assist with the development of industry standards, good practices, and advisory panels. These concepts could be developed in collaboration with federal agencies like NIST and the FTC. And FDA’s regulatory requirements for DTCs could be met with something as simple as full and adequate disclosures of the limitations of the tests by the testing companies. The result could be a happy medium to the benefit of consumers, the laboratories, the testing companies, the government and to taxpayers.” INVESTING CONTRARIAN Link:
Megan Smolenyak: Don’t “Protect” Us from Our Own Genetic Information

John Hussman is out with his latest weekly commentary. He continues to make good points about the market’s overvaluation despite the forward earnings crowd’s cries that P/E ratios (see Hussman: US shares are 40% overvalued). While Comstock Partners made a number of the points I highlighted in the last Hussman-based post regarding the inappropriateness of forward earnings multiples in their post Valuations, Hussman this time reaches into Tobin’s tool box for the Q-ratio as well:I can’t emphasize enough that when you hear an analyst say “stocks are cheap based on forward operating earnings” it would be best to replace that phrase in your head with “stocks are cheap based on Wall Street’s extrapolative estimates of a misleading number.”More sober and historically reliable measures of market valuation create a much more challenging picture. Apart from our own measures, which indicate continued overvaluation, there are several good indicators of market valuation that are not overly sensitive to year-to-year fluctuations in profit margins. One is based on the 10-year average of actual net (not operating) earnings, which is advocated by economist Robert Shiller, and another is Tobin’s “q” ratio which is based on comparing market value to replacement cost, and is advocated by Andrew Smithers. Both of these measures largely agree with our own measures, both presently and on a historical basis. Based on last week’s valuations, both suggest that the S&P 500 is substantially overvalued.

Switching gears for a second, I also ran across this blurb in John Hussman’s latest weekly letter. He talks about tax policy in ways I agree with.Republicans are pushing for an extension of the Bush tax cuts using supply side economic arguments that are patently false. Former Reagan domestic policy advisor Bruce Bartlett did a good job of debunking this in his piece Republican Tax Nonsense. Moreover, these tax cuts increased tax variability creating a perfect opportunity for the kind of tax arbitrage that the wealthy can play which workers who earn the vast majority of income from labour cannot.What should we do on taxes then? What Hussman suggests harmonizing tax rates across all of the different forms of income to reduce the opportunity for arbitrage. To make tax rates progressive he recommends increasing the exclusion so that workers making the least pay a lower mean tax rate even though their marginal rate is the same. This is what I would propose as well. I would also close as many loopholes as possible. The net result would be more simpler and more equitable.Economic Policy NotesThe U.S. economy continues to face the predictable effects of credit obligations that quite simply exceed the cash flows available to service them, coupled with the predictable shift away from the consumption patterns that produced these obligations. The misguided response of our policy makers has been to defend bondholders at all costs, using public funds to make sure that lenders get 100 cents on the dollar, plus interest, while at the same time desperately trying to prod consumers back to their former patterns of overconsumption. These policies are designed to preserve exactly the reckless and unsustainable behavior that caused the recent downturn. They are likely to fail because the strategy is absurd. The ultimate outcome, which will be forced upon us eventually if we do not pursue it deliberately, will be the eventual restructuring of debt obligations and a gradual shift in the profile of U.S. economic activity toward greater saving ” either to finance exploding government deficits, or preferably, to finance an expansion in productive investment, research and development, and capital accumulation.

From my perspective, bolder approaches are required. Debt that cannot be serviced should be restructured, rather than socializing the losses of reckless private decision-making. We will inevitably have a large “stimulus” package, but it will be essential to craft it in a way that emphasizes incentives to create and accumulate productive capital, both private and public.On the tax side, we also have options. There are far more possibilities than simply preserving or discarding the Bush tax cuts. Frankly, I was never a fan of those cuts, which added more variation, not less, in tax rates across various forms of income. Ideally, efficient tax systems should feature flat rates and very broad bases. You define income in a very wide manner, and you tax it all at the same rate. You introduce a progressive tax structure by creating large exclusions from taxes at low income levels, so that people at lower income scales pay no tax at all. In my view, the same thing should be done with Social Security ” drop the rate substantially, but include all income ” wage and non-wage. Three-quarters of Americans pay more in payroll taxes than in income taxes. By reducing the wedge between the hourly amount earned by employees and the hourly cost paid by employers, this strategy would create immediate incentives for employment. Moreover, it would raise more revenue because at present, even Warren Buffett only pays Social Security taxes on the first $106,800 of income. Combining a flatter income tax with a flatter and broader payroll tax would stimulate growth, employment, and greater economic efficiency without compromising total revenues.Great read. Look for the parts on the divergence between trailing S&P500 earnings and NIPA profits. His comments are not what I expected.Source: Don’t Take the Bait ” John HussmanJoin the conversation about this story ?

Economic ” Income tax ” Warren Buffett ” Progressive tax ” Employment

INVESTING CONTRARIAN

Continued here:
Hussman: Here’s Why The Market Is NOT Cheap And You Should Start Saving

Those of us who are now called “gold bugs” will soon be referred to as “genius rich persons who must be obeyed” because we bought gold, silver and oil while the rest of the world got laughably infatuated with paper assets, which top scholars will tell you shows why the word “infatuated” sounds sort of like “flatulence” in a secret-code kind of way, which (when one has successfully calibrated one’s Mogambo Secret Decode Ring (MSDR)) can be unscrambled to reveal the message, “You will be so rich that when you fart, you can ask “˜What is that smell?’ and all around you people who have been losing everything by not buying gold, silver and oil will answer in unison “˜It is truly the smell of sweet, sweet roses, second in delight only to the heavenly odor of your feet, oh, glorious genius rich person!’ because they know what will happen to them if they don’t.”I apologize for the vaguely threatening nature of the end of the foregoing, but such arrogance is the natural by-product of the arrogance one gets when one is rich, rich, rich because one has been buying gold, silver and oil with frantic abandon as one’s world was awash in new money created ” whole mountain ranges of new money created, indeed, whole freaking oceans of money were created! ” by the Federal Reserve, especially nowadays so that the idiotic, desperate, corrupt, lying Congress and an equally corrupt White House can horrifically conspire to deficit-spend us into some deep, dark, dank whirlpool of destruction and despair where prices rise so high as a result of all of this new money that newspapers report food riots in the streets, often while running lighthearted stories of the magnificent and opulent lifestyles of those who bought gold, silver and oil, often referred to as the Really, Really Rich (RRR), and how we live it up with cute Hollywood starlets and drive snazzy new cars!And it may happen sooner than you think, and hopefully as soon as I had dared hope, as an article titled “Mysterious BIS gold swaps are likely a bullion bank bailout” by Adrian Douglas of MarketForceAnalysis.com refers to the odd goings-on at the Bank for International Settlement as concerns a mysterious 380 tonnes of gold being involved in a mysterious gold swap with some commercial banks.I smell corruption, a foul odor not dispelled by Mr. Douglas noting, “While a central bank theoretically and practically could hold 380 tonnes of unencumbered gold, there is no way that a commercial bank is sitting on 380 tonnes of unencumbered gold.” Hmmm!His next sentence is pure horror film, if delivered in a darkly sinister voice, perhaps with some kind of foreign accent dripping intrigue. So lower the lights and set the spooky mood before saying, “So the gold in the BIS swaps came from” (pause for dramatic effect) “somewhere else.” Yikes!He asks, “Why would this be done?” Well, the answer is not, “To raise money! The cash is needed because I have had it Up To Here (UTH) with the wife and kids complaining about a more-than-generous 1,000 calorie-per-day diet, which is all I can afford after using all my money to buy more gold, which is selling for peanuts when compared to the staggering amounts of money being created by central banks around the world!”And why would I do such a thing? Because, as the Magnificent Mogambo (MM) himself said, “Gold at these prices is at the #2 spot of the Mogambo List Of Fabulous Investments (MLOFI), whereas the coveted #1 spot on the MLOFI is silver, which you will notice that I am not selling because of the compelling relative risk/reward ratio, no matter how much the ungrateful family whines and complains.”Mr. Douglas is too smart to be drawn into the swamp of my personal life, especially where it is always a desperate “me against them” situation. Without even mentioning what a shame it is that I would sell gold just to buy food for people who happen to look good with that thin and pallid, sunken-eyes and protruding-bone, “Goth” look, he says that it is not about the money anyway!He says, “This is not about currency liquidity, as the $14 billion reported raised is not liquidity; it is pocket change.” Hmmm!

Then he goes on, “On the other hand, 380 tonnes of gold is liquidity in the gold market, where mines produce only about 2,200 tonnes per year,” which I thought he would follow up with how output is actually falling, and how no new big gold discoveries are being made, or how few new mines are being opened, or how people are finally listening to the Wise Mogambo Advice (WMA) to buy gold, silver and oil, and maybe how they are slapping themselves on the forehead (Slap! “Ouch!”) and saying to themselves, “Who knew that That Mogambo Idiot (TMI)) was not as stupid as he sounded? He always said, “˜Buy gold, silver and oil when your idiotic, satanic central bank is creating excess amounts of money which will, because it must, show up as inflation in consumer prices, and buy them especially when the moronic government is deficit-spending the nation into asinine bankruptcy, where the national debt is over $13 trillion dollars and climbing at almost $2 trillion a year while GDP is barely $14 trillion! It’s insane, insane, insane!’ And I remember also that he used to say that buying gold, silver and oil to protect myself from this preposterous lunacy was so easy that I would feel the urge to exclaim, “˜Whee! This investing stuff is easy!'”But Mr. Douglas did not say any of that, and says instead that the deal is that “In this way the central bank or banks would get cash and the BIS would get the unallocated gold as collateral and as if by magic the bullion bank or banks would get 380 tonnes of gold to bail them out for a few more weeks as massive physical demand for metal eats their lunch.”In short, the giant gold-manipulation scheme that the Gold Anti-Trust Action committee spent years exposing, and getting attacked by critics who, it turns out, did not know what they were talking about, is running up against the only thing that could ruin their game; buyers are demanding physical gold instead of pieces of paper that say that they represent ownership of gold!And since the manipulation situation is even more outrageous for silver, you can see why I say, “Whee! Investing in gold, silver and oil is easy!”The Mogambo Guru
for The Daily ReckoningThe Sweet Smell of Investing in Silver and Gold originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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The Sweet Smell of Investing in Silver and Gold

The productive elements of the US economy are caught between powerful financial interests, e.g., banks seeking speculative gains, political constituencies seeking entitlements and government entities at all levels whose budgets and deficits are too large compared to their revenues.All three factions are competing for the same economic resources and all three are net consumers of wealth.? The triumph of any one faction or of any combination thereof, promises to erode capital and to encumber production and economic growth in the future.? As a consequence, capital can be expected to flow away from the United States to other parts of the world.If banks dominate over government, for example, ever larger shares of tax revenues will likely flow to banks as a consequence of interest payments and taxes will certainly rise despite inevitable austerity measures.? If government triumphs at the expense of banks, setting aside questions related to bank failures, bailouts or sovereign defaults, there is no reason to believe that government entities will become fiscally responsible or that the pattern of government expansion, as a percent of GDP, will reverse in the foreseeable future.The banking and financial services industries also represent a disproportionate share of US GDP.? Political constituencies seeking entitlements are, in part, a reaction against and a consequence of disproportionate growth of government and of the banking and financial services industries.? In advocating for or against any of the above factions, what seems to be ignored is where sustainable economic growth will come from in the future.Surrounded on all sides are entrepreneurs and private capital, which are the historical engines of US economic growth.? As the nation struggles to recover from the unprecedented global recession and the financial crisis that began in 2008, the competition between banks, government entities and political constituencies seeking entitlements represents a diversion of wealth and future production into economically unsustainable pursuits, such as bank profits, government stimulus or social welfare programs.? In economic terms, the relationship of banks, government entities and political constituencies seeking entitlements to the productive elements of the economy can be described as one of rent seeking.Rent seeking is a relationship where an individual, company or other organization seeks income by capturing the production of others through manipulation or exploitation of the financial, legal or political environment, rather than through ordinary market participation or the production of wealth.? Analogous to parasitism in biology, rent seeking means obtaining an economic gain at the expense of others without any reciprocal benefit.? Common examples of rent seeking include tariffs sought by industries for no purpose other than to boost profit margins and efforts by special interest groups to redistribute wealth in their favor by shifting tax burdens or government spending where there is no reciprocal benefit to any other group in society.Businesses that produce physical goods, i.e., real production, along with labor and existing capital derived from past production surpluses are the targets of rent seeking strategies.? The central question for economists is whether rent seeking is sustainable as an economic paradigm, i.e., as the dominant form of economic relationship in an economy.? If so, spending by those who successfully gain control of wealth will stimulate economic activity in a sustainable way and the economy will return to genuine growth.?For example, economic growth might return as bank profits trickle down through the economy; or as government borrowing and spending or expansion stimulate the economy and create jobs, e.g., government jobs; or as social entitlements, such as guaranteed retirement incomes or medical care, prove to be more efficient and less costly to society when provided by government and funded by tax revenues rather than by private industry.? If it turns out, however, that rent seeking is not a sustainable economic paradigm, then the future of the US economy will be characterized by an erosion of capital and an absence of sustainable economic growth.? One question that might arise in the latter scenario is whether capital will stay in the US or migrate to other parts of the world.? The answer to this question lies in the nature of capitalism, as well as in the historical origins of American capitalism.Property and LibertyIn terms of both economics and political philosophy, there are links between rent seeking where government is involved, the fundamental relation of individual citizens to the institution of the state, and macroeconomic developments in the US particularly since 1971.? These links became increasingly clear since the start of the global financial crisis that began in 2008.History bears out that capitalism, compared to other economic systems, has created more wealth, raised the living standards of more people, and has increased individual liberty to a greater extent.? The reasons for the success of capitalism lie not only in economics but also in philosophy.? The historical innovation and entrepreneurship and the immense industrial production of the United States in the past occurred both in the context of capitalism and in a social and legal framework established by the US Constitution.? Going back to the American Revolution and before, the ownership of an individual person of their own body and of the labor that it can produce literally distinguished a free person from a slave.? This concept is the common root of private property and of capitalism.? The natural right of a person to the fruits of their labor, i.e., to own property, is, therefore prerequisite to other rights.? In his seminal book, The Road to Serfdom, F. A. Hayek explained the interdependence of private property, the division of labor and freedom.””¦ [T]he system of private property is the most important guaranty of freedom.? It is only because the control of the means of production is divided among many people acting independently that we as individuals can decide what to do with ourselves.? When all the means of production are vested in a single hand, whether it be nominally that of “society” as a whole or that of a dictator, whoever exercises this control has complete power over us.? In the hands of private individuals, what is called economic power can be an instrument of coercion, but it is never control over the whole life of a person.? But when economic power is centralized as an instrument of political power it creates a degree of dependence scarcely distinguishable from slavery.? It has been well said that, in a country where the sole employer is the state, opposition means death by slow starvation.”? ” F. A. Hayek, The Road to Serfdom (1944)Of course, a human being is much more than an economic unit and the natural rights of individuals do not end with the absence of slavery, thus private property can be viewed as the keystone of all human rights.? In fact, provisions of the American Bill of Rights, such as the prohibition against unreasonable search and seizure are an elaboration and enumeration of private property rights vis-?-vis the rights of government.? Interestingly, the American Bill of Rights contains broad prohibitions against actions by government, rather than positive rights, such as the right of an individual to a particular social benefit.? In the modern world, private property and, therefore, other rights are not threatened directly by violence and coercion as they were prior to the American Revolution, but they are threatened today by excessive growth of government, by private concerns pursuing rent seeking profit strategies and by political constituencies seeking entitlements.Taxes levied on privately owned businesses or on private individuals for the purposes of social welfare programs function as a proxy for rent seeking in that they affirm a positive right to an economic benefit for one group at the expense of another group that receives no reciprocal benefit.? For example, the establishment of a legal right of a person with no means to pay for it, to obtain medical care, takes precedence over the property rights of individuals who have the means to pay for medical care on their own behalf.? In the example of medical care, it is likely that those upon whom the financial burden falls have little or no objection to the arrangement because a majority of individuals probably believe that their contribution is for a worthy cause, but the precedent of government intervention over volunteerism is a dangerous one from the standpoint of individual rights.While one group bears the economic cost, even if the only cost is reduced access to medical care or reduced quality of care, there is a more broad cost to society in terms of the erosion of individual rights.? In a rent seeking economic relationship where government is the agent of wealth transfers, it is not only exploited groups that loose rights but, in fact, all citizens.? When wealth is transferred or redistributed by government, rights removed from exploited groups are not transferred to groups that receive the resultant economic benefits but rather accrue to the government itself, thus diminishing the rights of all and expanding the power of government, i.e., the power to claim the wealth of it’s citizens for whatever purposes are deemed worthy.“The preservation of freedom is the protective reason for limiting and decentralizing governmental power.? But there is also a constructive reason.? The great advances of civilization, whether in architecture or painting, in science or in literature, in industry or agriculture, have never come from centralized government.”? ” Milton Friedman, Capitalism and Freedom (1962)While wealth transfers may be undertaken with the best intentions, over time, the eventual consequence is an aggregation and concentration of power in government at the expense of individuals.? Among other things, a precedent is established whereby rights are granted by government to citizens and not the reverse.? Wealth transfers by government, therefore, result in the expansion and centralization of economic and legal power in the government at the expense of the rights of individual citizens.?In the extreme, the flow of rights from individuals to government may eventually result in a totalitarian state structure where rights per se no longer exist, or exist in name only, replaced, in practice, by privileges granted by government at its sole discretion.? In terms of political philosophy, a constitutional republic aims to prevent totalitarianism (historically referred to as tyranny) by establishing that the people are sovereign and that the limited rights of government are granted to it at the sole discretion of the people.? In contrast, an economic system, based on government redistribution of wealth, is ultimately incompatible with a structure where the people are sovereign, i.e., a constitutional republic, simply because wealth redistribution requires that the rights of government take precedence over the property rights of individuals.There’s been one underlying basic fallacy in this whole set of social security and welfare measures, and that is the fallacy ” this is at the bottom of it ” the fallacy that it is feasible and possible to do good with other people’s money.? That view has two flaws.? If I want to do good with other people’s money, I first have to take it away from them.? That means that the welfare state philosophy of doing good with other people’s money, at its very bottom, is a philosophy of violence and coercion.? It’s against freedom, because I have to use force to get the money.? In the second place, very few people spend other people’s money as carefully as they spend their own.? The real problem with government is not the deficit.? The real problem with government is the amount of our money that it spends. ” Milton FriedmanIf the basic economic rights of individuals are undermined and government power expands, becoming more centralized, then controlling government spending may be problematic, particularly if doling out entitlements is central to the political goals of the regime in power, e.g., remaining in power.? As has been seen in Europe, government spending for the purposes of expanding entitlements is constrained only by the capacity to borrow and to service debt, which is a pattern that can lead to economic collapse.”A democracy cannot exist as a permanent form of government.? It can only exist until the majority discovers it can vote itself largess out of the public treasury.? After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”? ” Scottish historian Alexander Fraser Tytler, Lord Woodhouselee (1747-1813), unverified attributionTotalitarianism: Public or Private?Wealth redistribution is not the exclusive domain of government.? Inflationary policies by the US Federal Reserve erode the value of money and dilute the share of wealth held by those who depend on the monetary system while transferring wealth either to banks or to those who first receive newly created money.? The institution of central banking is itself a form of rent seeking where governments borrow their own currencies into existence from private banks passing the burden of repayment with interest on to taxpayers, e.g., as a value added or income tax, rather than maintaining the national currency as a public facility.? Central banking is associated both with economic rent seeking insofar as private interests successfully influence the central bank in their favor, and with political philosophy where the rights of individuals are concerned, e.g., monetary inflation deprives savers of the right to spend tomorrow money obtained in exchange for labor today at a value consistent with the terms of the exchange.? In the latter case, the central bank produces a de facto breach of contract that is technically legal.? As John Maynard Keynes famously said, “By a continuing process of inflation, government [or private interests that control the central bank] can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”? In this regard, one can see the extent of the powers abdicated by governments to central banks.? Central banks have the power to redistribute wealth and can do so either at the behest of government or, more importantly, in the service of private concerns.The advent of bank bailouts, amounting to roughly $4 trillion in the US officially, but perhaps as much as $23.7 trillion, during the global financial crisis that began in 2008 was remarkable for two reasons other than the danger of systemic collapse thus averted and the amounts of money involved.? First, it became apparent that large banks, and central banks, had more influence over governments than their own citizens.? In fact, a majority of Americans opposed bank bailouts.? Second, the power of central banks to transfer wealth was laid bare by the Federal Reserve’s purchase of mortgage backed securities which traded newly created money for what most observers agree was little more than worthless paper in an attempt to render otherwise bankrupt financial institutions solvent again.The independent actions of the US federal government and Federal Reserve produced record profits and bonuses in the banking sector while, at the same time, household wealth in America fell significantly, creating the popular impression that Wall Street was somehow looting Main Street.? The mechanism of wealth transfer, however, was actually the Federal Reserve, which had then been in place for 94 years prior to the crisis and during which, arguably, a similar process of wealth transfer had taken place gradually on a smaller scale.? The arbitrary and sweeping nature of the emergency actions taken by the federal government and Federal Reserve in response to the financial crisis revealed the extent to which the powers of both the federal government and Federal Reserve had quietly expanded and become more centralized over a period of less than 100 years to a point of near absolute control over the wealth, i.e., the property, of US citizens.? The roots of these developments, however, lay not in the economic bubbles leading up to the financial crisis that began in 2008 but in the 1913 Federal Reserve Act and in the New Deal that followed the resulting Great Depression.

“Legal plunder can be committed in an infinite number of ways; hence, there are an infinite number of plans for organizing it: tariffs, protection, bonuses, subsidies, incentives, the progressive income tax, free education, the right to employment, the right to profit, the right to wages, the right to relief, the right to the tools of production, interest free credit, etc., etc. And it is the aggregate of all these plans, in respect to what they have in common, legal plunder, that goes under the name of socialism.” ” Frederic Bastiat, The Law (1848)After World War II, the United States had embraced labor unions and social programs partly in response to the ideological struggle between the US and the Soviet Union, which was a totalitarian state, but the US, while fighting totalitarianism, planted the seeds of totalitarianism in its own backyard.? Following decades during which social welfare programs expanded, and during which both the federal government and the financial sector grew dramatically as percentages of US GDP, the centralization of power revealed in 2008 indicated a largely unrecognized shift in political philosophy toward a totalitarian state structure.A Monetary Empire in DeclinePerhaps every empire in decline witnesses a transition from surplus production to excess consumption and that is precisely what happened in the United States in the 1970s, marked first (after the establishment of the US Federal Reserve and then of a welfare state by President Franklin Delano Roosevelt) by the final abandonment of the gold standard in 1971 then by the 1975 shift from trade surplus to trade deficit.? Both events were a consequence of spending in excess of real wealth production.? These events ushered in the era of offshoring in the 1980s and of outsourcing to foreign firms in the 1990s.? The idea was simple: exchange higher domestic costs for lower costs abroad and sell virtually the same products to the same domestic customers at higher margins, lower prices to gain market share, or simply hold prices at competitive levels by cutting costs.? Under the banner of free trade, and later of globalization, the US government did virtually nothing to curtail these trends and the US economy appeared to expand as US dollars flooded the world in an unprecedented period of monetary expansion.? As the accompanying deindustrialization of the United States progressed, two developments, in addition to the then accumulated capital in the US, mitigated the impact of declining US industrial production: (1) growth in service industries and (2) a combination of asset appreciation and increased consumer borrowing and spending (eventually reaching an unsustainable 70% of GDP), but both were fundamentally linked to monetary expansion and neither proved to be sustainable.Replacing industrial production with a service economy was a flawed concept because as domestic production fell, it was, in fact, debt expansion that replaced the creation of real wealth, thus the US trade deficit soared.? As factories closed and as jobs departed US shores for Taiwan, China, India and elsewhere, the selling of equivalent foreign-made goods and offshore services to Americans into a domestic market that included a growing number of displaced workers, became less and less plausible.? The idea that displaced American workers would eventually embark upon new, service industry careers and, therefore, maintain their spending levels, in retrospect, was plainly wrong.? While perhaps viable in a perfectly balanced global economy, it is difficult to imagine a sustainable domestic economy, in itself, comprising a majority of services since it would have to rely on material goods from abroad, i.e., it would suffer a chronic trade deficit.? The answer for American businesses was to expand into global markets but this did little for the domestic economy, thus the US service economy failed to replace declining industrial production.? What happened, in reality, was that the percentage of the total US population in the work force simply declined, flooding welfare roles and producing a growing political constituency favoring wealth redistribution.?

Chart courtesy of the Federal Reserve Bank of St. LouisOne way to characterize the sequence of events in the US is to say that a paradigm shift took place where the US economy moved from production to consumption; from an industrial economy to a (so-called) service economy; from wealth creation to wealth extraction; from increasing living standards to wealth redistribution; from a nation of citizens and workers to a nation of “consumers,” all the while transitioning from the largest lender in the world to the largest debtor nation in the entire history of the world.? In terms of US government spending, unsustainable growth in entitlements and pork barrel politics became business as usual in Washington D.C., while Wall Street shifted from investing, in order to participate in dividends and capital gains resulting from production and value creation, to trading based on technical indicators; a competition where participants seek to extract wealth from investors and other traders in what amounts to a casino game, i.e., a rent seeking structure.? Flash trading using automated trading systems and high-frequency trading algorithms, for example, is pure rent seeking in the garb of high technology.Other advanced economies, in varying degrees, have followed the American example, resulting in the emergence of rent seeking as the dominant economic paradigm of Western countries.? To make matters worse, rent seeking by private concerns has become confused with capitalism.The Flight of CapitalIn the past, capital and individual entrepreneurs flowed into the United States from around the world because it represented two related things: freedom and economic opportunity.? The post bailout world is one where large banks have, to some degree, hijacked the emergent totalitarian powers of governments in a model where perpetual sovereign debt represents a virtually unlimited flow of wealth from the subjects of totalitarian states to the banks that, through the institution of central banking, exert considerable influence over each nation’s government.? The post bailout economy seems to be a veritable frenzy of rent seeking activity by banks, governments and political constituencies seeking entitlements.? In all three cases, individual liberty, e.g., the right to own property is an impediment and the success of any of the three factions promises to encumber or to prevent entirely future economic growth.? It makes little difference to individuals if the fruits of their labor are confiscated by inflation, by taxes to fund unsustainable government expansion, or by taxes to fund social welfare programs.? In all three cases, the impetus toward entrepreneurship and the incentives for putting private capital, i.e., private property, at risk in new business ventures are reduced or eliminated.? Regardless of which rent seeking faction wins, capitalism, which has created more wealth, raised the living standards of more people and which, because of its intrinsic compatibility with private property, has increased individual liberty more than any other economic system in the history of the world, is set to lose.Capitalism, rather than ceasing to exist, will obviously adapt, thus capital will migrate away from economies characterized by rent seeking, i.e., by the consumption of wealth, to parts of the world characterized by the production of wealth.? Capital may also be driven into black markets as seen under the former Soviet Union.? All other things being equal, the next decade is likely to see a massive flight of capital from the United States to countries where property rights are respected (or where government is simply smaller) and where the values of investments are less vulnerable to the ravages of excess monetary expansion, counterproductive taxation and sovereign debt risk or redistribution by government in the service of political constituencies seeking entitlements.? Within the latter constraints, China and emerging economies that are rich in natural resources and that produce commodities or physical goods will surely become the new bastions of capitalism.(This guest post comes courtesy of Hera Research)Hera Research, LLC, provides deeply researched analysis to help investors profit from changing economic and market conditions.? Hera Research focuses on relationships between macroeconomics, government, banking, and financial markets in order to identify and analyze investment opportunities with extraordinary upside potential. The Hera Research Newsletter covers key economic data, trends and analysis including reviews of companies with extraordinary value and upside potential.Join the conversation about this story ?

INVESTING CONTRARIAN

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Here Comes The Imminent Flight of U.S. Capital

?What separates the 10% that make money from the 90% that don’t?10,000 hours.In his recent book “˜Outliers’ Malcolm Gladwell describes the 10,000-Hour Rule, claiming that the key to success in any cognitively complex field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours. 10,000 hours equates to around 4hrs a day for 10 years. For some reason most people that “˜try their hand’ at trading view it as a get rich quick scheme. That in a very short space of time, they will be able to turn $500 into $1 million! It is precisely this mindset that has resulted in the current economic mess, a bunch of 20-somethings being handed the red phone for financial weapons of mass destruction. The greatest traders understand that trading much like being a doctor, engineer or any other focused and technical endeavor requires time to develop and hone the skill set. Now you wouldn’t see a doctor performing open heart surgery after 3 months on a surgery simulator. Why would trading as a technical undertaking require less time?Trading success, comes from screen time and experience, you have to put the hours in!Education, education, education.The old clich? touted by politicians when they can’t think of anything clever to say to their audience. The importance of education to success in trading cannot be placed on a high enough pedestal. You have to learn to earn, the best traders work obsessively to refine their edge further to stay ahead of the curve.Think for yourself.“NO! NO! NO!””¦ “Bear Stearns is not in trouble””¦”Don’t move your money from Bear! That’s just silly! Don’t be silly!”A quote from well known stock guru Jim Cramer aired on CNBC days before Bear Stearns lost 90% of its value. Many followed this call and felt the obvious pain as a result. As the old saying goes, “too many cooks spoil the broth” it is very much the same in trading. Successful traders blinker themselves from the opinions of others; they focus on their own analysis of fundamental and technical information.Adapt or Die.Market conditions change and technology advances, thus the conditions for trading are always evolving, the rise in mechanical trading is testament to that. The very best traders through a process of education and adaptation are constantly staying ahead of the curve and creating ever new and ingenious methods to profit from the markets evolution.Fail to plan, you plan to fail.The best traders have a well documented plan; they know exactly what they are looking for and follow that plan to the letter. Their preparation for a trade starts long before the market open, it is this meticulous planning and importantly adherence to that plan that helps them avoid the biggest demons for any trader, over trading and revenge trading.“Be like Machine”

As human beings emotions pay a key role in our existence, for a trader emotions can be a source of great pain. Trading psychology and the management of your emotions in a trade play a key role in overall success. Fear and greed can cut your winners short and let your losers run. Dealing with emotions follows on from your plan; the more robust your plan the less likely you are to fall into the emotional mine field.Know your toolsEvery trader has a set of tools they use, DOM, Charts, News feeds etc. These tools are a traders bread and butter; they are the most vital part of a traders arsenal, without which it would be impossible to trade. The best traders have mastered their order entry methodology, they know all about the features they need from their charts. This mastery of their tools, allows the trader to get the very best out of the resources they have available to them and ensures perfect execution of their trading ideas.Know ThyselfBehind all the egos and excess, the best traders know their limitations; they focus on what can go wrong in a trade, and expend a lot of energy in limiting and controlling their risk before thinking about profits. They have a heightened sense of self-awareness and focus on incremental self improvement.Profit & LossThe best traders focus on the trade itself rather than the P&L; they view each trade as a technical exercise and focus on getting the most out of the market in accordance with their plan. They do not think in terms of the grocery payment, the electric bill and the desire to make X amount to cover a mortgage payment. Focusing on the money behind a trade can cloud technical objectivity.In ConclusionThe greatest traders work hard to get ahead and even harder to stay ahead. Through increased and niche knowledge they constantly adapt with the market and remain profitable in every environment. Drive, tenacity and the will to succeed is the greatest edge of every successful trader.Harvesting profits from the financial markets ” www.pivotfarm.com??

Original piece here.Risk assets plunged today, with Nikkei futures seeing a 250 point drop Thursday overnight, as the Yen was bid heavily across all pairs, with funds flocked to safe haven and carry trades reversing course. Several commodity FX yen crosses are on the precipice of head and shoulders breakdowns, after selling off heavily back to their necklines. Today’s biggest mover in FX was CAD/JPY in fact, which is very deflationary. Commodities in general are losing their fundamental bid. Intermarket corrs are at 1987 crash highs, eliminating the diversification premium investors offer for commodities. And global growth slowdowns, austerity, and deflationary threats in Eurozone, USA, & Japan are bearish for commodities, the nations that export them, and risk in general.Speaking of commodities, the Aussie Dollar suffered big selling as well, both against JPY & USD. The skyrocketed nominal housing prices and very hawkish rate policy since crash lows could turn out to be more bearish than bullish if exports to China slow, as Chinese economic data and the one-time nature of its stimulus package suggest. With the Baltic Dry Index posting record consecutive losses, global trade probably will not be a “way out” of bearish developments in the forthcoming months.On a technical basis, the AUD/USD seems to have double-topped at its June highs and was unable to break up to or back above its 200DMA (which price has had very high confluence to), leading to its current bear flag formation. As my technical analysis and FX Concept’s Jonathan Clark’s views suggest in the charts below, it appears to be a great short. The AUD/JPY does as well, as it found selling at its 55DMA and appears primed for a move down to 72.50 and 70.00 support levels, the latter of which corresponds to April 2009 levels.

And with the Aussie Dollar, so goes copper, as it is primed for a breakdown through the 2.60-2.70 zone, after finding selling at its 55DMA.

Even gold has bearish chart developments, breaking down through its 55DMA and subsequently forming a bear flag. The long gold/short euro trade on sovereign debt crisis was a popular and crowded position many traders took during the euro’s plunge but with the recent diminished-interbank-funding-fueled euro rally, many of these positions will most likely be facing liquidation and unwinding. The chart below exemplifies the recent inverse relationship between gold and euro (historically not the case) with DZZ (inverse gold ETF) and EUR/USD spot.

With AUD, CAD, copper, oil, and gold selling off big and showing very bearish chart developments on intermediate and long term time frames, the markets currently imply very deflationary developments. The biggest news in JPY space, however, was the USD/JPY breakdown below 87 support. The cross experienced a breakdown last November through that level but it reversed course very quickly. The last time the dollar fell below that level for a material amount of time was 1995, which subsequently led to the BOJ instituting ZIRP. Fifteen years later, Japan hasn’t changed policy and nominal rates cannot fall any further. BOJ intervention is becoming increasingly likely. This time around, however, the sovereign sector is levered up and further monetary easing may lead to secular shifts in perception and eventually result in a JGB crisis (previously out of the question due to the private/financial sectors being the ones with bad debts, which inherently causes a rush to safety of its yet-to-be-levered up government’s bonds).Equity space also found big selling today, with the S&P down 2.88%, after finding huge resistance at its 55DMA (starting to sound familiar?). The head and shoulders (neckline 1015) remains in play and deteriorating price and expanding volume to the downside suggest this down move will be sustained for some time. The head and shoulders target is around 815, near February 2009 lows/support. A chart of the SPY ETF proxy is posted below, to show volume as well as price action.

And with the 12 month moving average breaking down (and subsequently retracing and resuming selling), this wave down is implied to be a longer-term selloff rather than a correction.

The technical confluence in all of the charts of risk assets is an alarming development. With so many assets (in all classes) sitting on head and shoulders support levels after selling off from 55 and 200DMAs on heavy and expanding volume, the downside risk to risk assets is very high and a strong move down appears the most likely scenario.This also coincides with the safe havens finding strong bids, namely USD, JPY, & Tsys. 10Yr yields are back below 300bps (as we were expecting in previous posts) and still implying much further price declines in equity, a correlation we have been tracking for weeks.

Everything is moving in tandem, which is indicated in inter- and intra-market correlations at or near all-time highs. Meanwhile, the JCJ Implied Correlation Index closed today just under 75, implying crash risk is elevated.’

The selling in risk implies a rush to cash globally, with the currencies with largest debt outstanding finding the largest bids ahead of deleveraging. Interbank funding costs have also dramatically risen, especially in Europe, where the Euribor-EUR Libor spread is spiking, indicating a larger portion of marginal interbank lending is occurring at the higher end of reported rates. Again, very deflationary developments.And market internals aren’t any better, with breadth very negative and volume expanding greatly as markets selloff. The 20DMA on SPY volume is currently about 40% higher than just last March, in the middle of the exhaustion phase of the massive rally. In addition, July 6 saw the first “Hindenburg Omen” issued since July 2008, two months before the stock market crash. There were also Hindenburg Omens issued in June 2007, four months before the all-time top in American equity markets. Historically, these occurrences resulted in a 5%+ move to the downside 77% of the time and have preceded every major market crash. We don’t expect another crash of fall 2008 proportions, but we do expect a strong move down in risk markets, possibly in all-out panics in certain assets, such as certain commodity currencies vs JPY & USD and specific Euro nation bonds (specifically CEE and Spain).Economic data is supporting what the markets are beginning to price in as they reverse and sell of, on big volume. The ECRI LEI came in today at -9.8, which historically has always preceded a recession. Consumer confidence at 66.5 vs 74.5 consensus vs 76.0 prior. And the below-consensus China GDP numbers have been adding downside pressure as well. It appears that global growth recovery has peaked and as peak stimulus is spent and a global push for austerity is underway, deflationary forces are beginning to be priced back into the market.And Hungary’s breakdown of talks with IMF & EU signify two things: 1. without austerity (and consequently significant economic deterioration), nations (esp CEE) will not qualify for IMF funding; 2. the Hungary situation will bring back the theme of European sov debt crisis, which should shift the EUR trend back down as interbank funding loses thematic importance to sovereign funding; and 3. go long USD/HUF and CHF/HUF and stay long.